9/19/2001 @ 9:00AM

Stock Focus: Regional Banks

Prior to Sept. 11, regional banks and thrifts were one of the stock market’s few bright spots. The Standard & Poor’s index of regional bank stocks has an 18% total return over the past 12 months, versus a 58% decline in the Nasdaq Composite index.

The regionals have already benefited from the decline in interest rates, which increases their spread on what they pay on deposits to what they earn by lending money long term. In light of recent events, the Federal Reserve announced an additional, more aggressive, rate cut of half a percentage point.

While valuations for many regional banks have inched higher due to the perception of safety within the sector, some standouts still remain attractive. “General regional banks may have reached valuations higher than their long-term trend lines, but you still want to invest in niche banks, such as those targeting the Asian population in California,” notes Campbell Chaney, analyst at Sutro & Co.

One such bank favored by Chaney is San Marino, Calif.-based
East West Bancorp
, which primarily serves the Chinese-American community. East West has about 30 branches in Los Angeles and is the first bank in the U.S. to offer online banking in Chinese.

Chaney notes that several other regional banks are enjoying success by targeting the same potential market segment as East West. He also likes San Francisco-based
UCBH Holdings
, Los Angeles-based
Cathay Bancorp
and
GBC Bancorp
. “There’s an ocean of business, so all four of these could run at capacity without bumping into each other,” claims Chaney.

The table below lists seven banks that are niche players or standouts within the regional banking sector. The stocks sell for no more than 19 times estimated 2001 earnings and have market values between $300 million and $4 billion.

Southwest Bancorporation of Texas
offers a full range of commercial and private banking services through 33 full-service branches in the Houston area. “Southwest has benefited from the consolidation of the Texas banking market, and it is feasting on pieces of business taken away by former employees of larger banks who have taken their clients with them upon joining Southwest,” explains analyst Jon Arfstrom from Dain Rauscher Wessels.

Southwest Bancorp’s relationship-based business and exceptional management has helped it experience consistent growth in earnings per share. The company has a five-year earnings growth rate of 18%. Shares of Southwest trade at 19 times estimated 2001 earnings per share of $1.54.

Arfstrom also recommends
TCF Financial
, which is a considerably larger regional bank operating 350 branches in Colorado and the Midwest. In January 1998, TCF acquired 76 Jewel-Osco supermarket branches in Chicago to help it increase its exposure in the supermarket-banking arena.

TCF has more than 1,400 automatic teller machine locations–an extremely high number for a bank its size. “TCF is a fantastic bank that’s very niche focused on offering convenience banking and in-store supermarket-banking products,” says Arfstrom. TCF stock sells at 16 times estimated 2001 earnings per share of $2.67.

Regional Bank Stocks
Prices as of Sept. 18. P/E: Price-to-earnings ratio. EPS: Earnings per share. *Annualized; projected over the next three to five years. Sources: FT Interactive Data, Thomson Financial/IBES and Market Guide via FactSet Research Systems